Biocon's Q3FY20 results (Underperformer) - EBITDA miss; Biologics pick up from Q4 key monitorable

Q3FY20 result highlights

• Consolidated Revs came at Rs17.5bn vs est Rs17.6bn; Revs were largely inline despite lower biologics revs – Rs5.9bn vs est Rs6.5bn. Syngene revs were inline at Rs5.2bn; Revenue traction pickup in biologics  continues to be relatively muted despite limited competition in bPegfilgrastim market in US, likely due to limited capacities. Q4 will be a key monitorable for biologics as the additional capacity ramps up. Small molecules revs and branded formulations revs beat est
• EBITDA came at Rs4.5bn vs est Rs4.9bn; Q2 was Rs4bn; EBITDAM – 25.5% vs est 28% (Q2- 25.6%). EBITDA missed due to lower gross margins and higher R&D expenses; Gross R&D spends of Rs1.5bn with Rs240m capitalized
• PBT came at Rs3.2bn (10% qoq) lower than est. Adj. PAT below est at Rs2.25bn vs est Rs2.6bn; Reported PAT was lower by Rs220m owing to tax impact of exceptional items related to transfer of proteins to subs.
• Mgt has guided that biologics sales will continue to grow through the quarters and will pick-up momentum with the bTrastuzumab launch in US and availability of significantly larger bPegfilgrastim capacities. While R&D costs are also expected to increase going forward, overall EBITDA should scale-up steadily over the next few quarters.
• Biocon has sold 2.44% stake in Biocon Biologics India (BBIL) to PE firm True North for Rs5.36bn; this value BBIL at ~$3bn (in line with est). This transaction is a pre-cursor to BBIL IPO going forward.

Impact on financials: We have reduced by FY20 / FY21 earnings by 3% each and have incorporated our FY22 earnings estimates.  

Valuations & view

With commencement of bPegfilgrastim and bTrastuzumab revenues in the US and guidance for bGlargine US launch in H2FY21, Biocon’s biosimilar portfolio commercialization has truly begun. Going forward, Biocon-Mylan’s ability to compete with formidable competitors will determine the scale of their success. We believe that Biocon is best positioned amongst Indian players to leverage on the global biosimilar theme and will have the best earnings growth amongst peers over the next 2-3 years. While we are positive on the potential of Biocon’s biologics business, we see limited upside in Biocon valuations from current levels. Faster than estimated biologics revenue scale-up (tracking company aggressive guidance of $1bn biologics revenues by FY22) and visibility on incremental biologic launches will be upgrade triggers for BBIL valuations as well as Biocon. Maintain Underperformer rating with a SOTP target price of Rs279.